17 January, 2012

We've all watched smart, experienced leaders make flawed - even catastrophic - decisions. Some believe they have made the right choice, even when the disastrous consequences are staring them in the face. What is the root cause of these failures? How can the risks be reduced? And how can you be sure that you're making the right decisions?

In this fascinating and instructive book, Sydney Finkelstein, Jo Whitehead, and Andrew Campbell - each a distinguished expert on strategy and decision making in corporations - show how the usually beneficial processes of the human mind can become traps: experience and emotion can distort our judgment, even while we're striving for objectivity, and we fail to sport errors in our thinking.

In this follow-up to the #1 bestseller, Why Smart Executives Fail, Sydney Finkelstein and co-authors Jo Whitehead and Andrew Campbell turn their attention to such major strategic decisions as the war in Iraq, Hurricane Katrina, and numerous business cases to explain why decision-makers sometimes think they're right when they are really wrong. The book takes up recent research in neuroscience, cognitive psychology, and management to not only document why things go wrong, but also to offer a series of solutions that reduce our vulnerability to falling into the traps that lead to bad decisions. In light of the ongoing financial crisis, the lessons from this book are especially timely.

Why do smart and experienced leaders make flawed, even catastrophic, decisions? Why do people keep believing they have made the right choice, even when disastrous result stare them in the face? And how can you be sure you’re making the right decision—without the benefit of hindsight? Think Again shows how our brains can mislead us. The shortcuts our brains have learned to take over millennia of evolution help us most of the time. But, under certain conditions, they can derail our decision making. Think Again offers a powerful model for identifying when we are at risk – the red flags to watch for – and how we can design safeguards to help us make good decisions. Using examples from business, politics, and history, Think Again deconstructs bad decisions, as they unfolded in real time, to show how you can avoid the same fate.

Think Again provides a new model to help us make better decisions. With vivid stories ranging across industries and disciplines, the authors deconstruct bad decisions and identify the forces that have produced them. They go on to show you how to recognize the conditions - red flags - under which good decision making is most likely to falter, and offer a way of selecting safeguards that reduce the risk and ensure better outcomes.

There is no guarantee for perfect decisions. But with Think Again, you can understand the hurdles between you and success, manage to counterbalance their effects, and make better decisions - every day.

Sydney Finkelstein is the author of Why Smart Executives Fail, is a professor at the Tuck School of Business at Dartmouth, and regularly lectures on leadership and why leaders fail. Jo Whitehead and Andrew Campbell are directors of the Strategic Management Centre at Ashridge Business School.

With Congress grilling bank CEOs Wednesday, it's a timely question. Regulators and business leaders continue to try to figure out how decision-makers' missteps may have triggered the economic meltdown.

Sydney Finkelstein, a professor at Dartmouth's Tuck School of Business, has studied decision-making, and tried to track down some answers in a new book he's co-authored called "Think Again: Why Good Leaders Make Bad Decisions and How to Keep it From Happening to You."

Mr. Finkelstein and his co-authors looked at research in neuroscience and psychology as well as management. He talked with The Journal recently; here are edited excerpts of the conversation.

What are the main reasons that leaders make bad decisions?

Leaders tend to rely on past experience that seems useful, but is actually sometimes dangerous. One of the most well known [examples] is Dick Fuld at Lehman. He saved Lehman in the aftermath of the LTCM crisis in the late '90s. Fast forward 10 years or so and he also, I believe, thought he would do it again. But the experience he was relying on was not the same as this massive housing-driven collapse. It's much more complex, much more complicated.

We always talk about how important experience is. I think we overstate experience, because it doesn't exactly fit the situation you're in. You're liable to rely on it in a way that's just not going to be that helpful.

Why else do people make bad decisions?

A second reason has to do with self-interest. Most people don't realize self-interest operates at a subconscious level. We're not even aware of how self-interested we are. That is my take on the John Thain bonus story. Is there anyone who believes that he is not a smart enough guy to figure out that taking or giving [such large] bonuses [was not] a sensible thing to do?

It doesn't make a lot of sense. So how do you explain it? My explanation is that it was the subconscious of his brain taking charge.

The third one is what we call prejudgments. Leaders make prejudgments about their businesses that sometimes turn out to be wrong. In the book we studied Hurricane Katrina. We looked at the Department of Homeland Security, the operations center. The head of that group made an early prejudgment that Katrina was not going to be much more different than any hurricane in Florida, and he stuck to that prejudgment. [He later testified to Congress] that he saw a report on CNN of people partying in the French Quarter, believed they had dodged a bullet. Meanwhile there were literally dozens and dozens of other data points flowing into the operations center saying it wasn't quite the party he was observing.

Why does a smart experienced [leader] make a mistake like that? I think it's this vulnerability to prejudgment -- deciding something is the way it is early on and sticking to it no matter what.

Anything else?

The fourth one is what we call attachments -- attachments to people or places or things. For example, company after company is engaged in downsizing and maybe selling off businesses. Whether or not that proceeds in the best way possible is going to depend in part on the extent to which the CEO and other members of the executive teams in these companies are aware of the attachments that they might have. Are they going to sell off a business they helped build themselves? How will they think about the types of people that they need to remove?

What are some of the ways leaders can avoid making bad decisions?

People need to recognize that we are biased in every single situation. There's no such thing as objectivity.

The first thing leaders should do to reduce their odds of making bad decisions is walk into an important decision situation saying, "Ok, I know that we are potentially biased in a variety of ways. Let's try to identify what those are."

Second is to avoid the "yes man" trap. You have to bring different people and different data sources to the table. You want to add a "no team" to argue against the proposal, and put some teeth behind that no team.

What else do you suggest?

Another idea is around governance. I'm completely convinced that the biggest differentiator between high quality boards and weaker boards is the extent to which they actually engage in real debate.

As a student of leadership and success, I’m a junkie for the stream of articles and business books that package up business research, observations, and insights into digestible bits. Somehow I had missed Sydney Finkelstein’s 2004 work on failure, and thought I’d share this review published in Forbes (02/01/2012).

Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College in Hanover, N.H., published Why Smart Executives Fail eight years ago.

In it, he shared some of his research on what more than 50 former high-flying companies – including Enron, Tyco, WorldCom, Rubbermaid and Schwinn – did to become complete failures. It turns out that the senior executives at the companies all had seven habits in common. Prof. Finkelstein calls them the seven habits of spectacularly unsuccessful executives.

Habit #1: They see themselves and their companies as dominating their environment

This first habit may be the most insidious, since it appears to be highly desirable. Shouldn’t a company try to dominate its business environment, shape the future of its markets and set the pace within them? Yes, but there’s a catch. Unlike successful leaders, failed leaders who never question their dominance fail to realize they are at the mercy of changing circumstances. They vastly overestimate the extent to which they actually control events and vastly underestimate the role of chance and circumstance in their success.

CEOs who fall prey to this belief suffer from the illusion of personal pre-eminence: Like certain film directors, they see themselves as the auteurs of their companies. As far as they’re concerned, everyone else in the company is there to execute their personal vision for the company. Samsung’s CEO Kun-Hee Lee was so successful with electronics that he thought he could repeat this success with automobiles. He invested $5-billion (U.S.) in an already oversaturated auto market. Why? There was no business case. Mr. Lee simply loved cars and had dreamed of being in the auto business.

Habit #2: They identify so completely with the company that there is no clear boundary between their personal interests and their corporation’s interests

Like the first habit, this one seems innocuous, perhaps even beneficial. We want business leaders to be completely committed to their companies, with their interests tightly aligned with those of the company. But digging deeper, you find that failed executives weren’t identifying too little with the company, but rather too much. Instead of treating companies as enterprises that they needed to nurture, failed leaders treated them as extensions of themselves. And with that, a “private empire” mentality took hold.

CEOs who possess this outlook often use their companies to carry out personal ambitions. The most slippery slope of all for these executives is their tendency to use corporate funds for personal reasons. CEOs who have a long or impressive track record may come to feel that they’ve made so much money for the company that the expenditures they make on themselves, even if extravagant, are trivial by comparison. This twisted logic seems to have been one of the factors that shaped the behaviour of Dennis Kozlowski of Tyco. His pride in his company and his pride in his own extravagance seem to have reinforced each other. This is why he could sound so sincere making speeches about ethics while using corporate funds for personal purposes. Being the CEO of a sizable corporation today is probably the closest thing to being king of your own country, and that’s a dangerous title to assume.

Habit #3: They think they have all the answers

Here’s the image of executive competence that we’ve been taught to admire for decades: a dynamic leader making a dozen decisions a minute, dealing with many crises simultaneously, and taking only seconds to size up situations that have stumped everyone else for days. The problem with this picture is that it’s a fraud. Leaders who are invariably crisp and decisive tend to settle issues so quickly they have no opportunity to grasp the ramifications. Worse, because these leaders need to feel they have all the answers, they aren’t open to learning new ones.

CEO Wolfgang Schmitt of Rubbermaid was fond of demonstrating his ability to sort out difficult issues in a flash. A former colleague remembers that under Mr. Schmitt,” the joke went, ‘Wolf knows everything about everything.’ In one discussion, where we were talking about a particularly complex acquisition we made in Europe, Wolf, without hearing different points of view, just said, ‘Well, this is what we are going to do.’”

Leaders who need to have all the answers shut out other points of view. When your company or organization is run by someone like this, you’d better hope the answers he comes up with are going to be the right ones. At Rubbermaid they weren’t. The company went from being Fortune’s most admired company in America in 1993 to being acquired by the conglomerate Newell a few years later.

CEOs who think their job is to instill belief in their vision also think that it is their job to get everyone to buy into it. Anyone who doesn’t rally to the cause is undermining the vision. Hesitant managers have a choice: Get with the plan or leave.

The problem with this approach is that it’s both unnecessary and destructive. CEOs don’t need to have everyone unanimously endorse their vision to have it carried out successfully. In fact, by eliminating all dissenting and contrasting viewpoints, destructive CEOs cut themselves off from their best chance of seeing and correcting problems as they arise. Sometimes CEOs who seek to stifle dissent only drive it underground. Once this happens, the entire organization falters.

At Mattel, Jill Barad removed her senior lieutenants if she thought they harboured serious reservations about the way that she was running things. Mr. Schmitt created such a threatening atmosphere at Rubbermaid that firings were often unnecessary. When new executives realized that they’d get no support from the CEO, many of them left almost as fast as they’d come on board. Eventually, these CEOs had everyone on their staff completely behind them. But where they were headed was toward disaster. And no one was left to warn them.

Habit #5: They are consummate spokespersons, obsessed with the company image

You know these CEOs: high-profile executives who are constantly in the public eye. The problem is that amid all the media frenzy and accolades, these leaders’ management efforts become shallow and ineffective. Instead of actually accomplishing things, they often settle for the appearance of accomplishing things.

Behind these media darlings is a simple fact of executive life: CEOs don’t achieve a high level of media attention without devoting themselves assiduously to public relations. When CEOs are obsessed with their image, they have little time for operational details. Tyco’s Dennis Kozlowski sometimes intervened in remarkably minor matters, but left most of the company’s day-to-day operations unsupervised.

As a final negative twist, when CEOs make the company’s image their top priority, they run the risk of using financial-reporting practices to promote that image. Instead of treating their financial accounts as a control tool, they treat them as a public relations tool. The creative accounting that was apparently practised by such executives as Enron’s Jeffrey Skilling or Tyco’s Mr. Kozlowski is as much or more an attempt to promote the company’s image as it is to deceive the public: In their eyes, everything that the company does is public relations.

Habit #6: They underestimate obstacles

Part of the allure of being a CEO is the opportunity to espouse a vision. Yet, when CEOs become so enamoured of their vision, they often overlook or underestimate the difficulty of actually getting there. And when it turns out that the obstacles they casually waved aside are more troublesome than they anticipated, these CEOs have a habit of plunging full steam into the abyss. For example, when Webvan’s core business was racking up huge losses, CEO George Shaheen was busy expanding those operations at an awesome rate.

Why don’t CEOs in this situation re-evaluate their course of action, or at least hold back for a while until it becomes clearer whether their policies will work? Some feel an enormous need to be right in every important decision they make, because if they admit to being fallible, their position as CEO might seem precarious. Once a CEO admits that he or she made the wrong call, there will always be people who say the CEO wasn’t up to the job. These unrealistic expectations make it exceedingly hard for a CEO to pull back from any chosen course of action, which not surprisingly causes them to push that much harder. That’s why leaders at Iridium and Motorola kept investing billions of dollars to launch satellites even after it had become apparent that land-based cellphones were a better alternative.

Habit #7: They stubbornly rely on what worked for them in the past

Many CEOs on their way to becoming spectacularly unsuccessful accelerate their company’s decline by reverting to what they regard as tried-and-true methods. In their desire to make the most of what they regard as their core strengths, they cling to a static business model. They insist on providing a product to a market that no longer exists, or they fail to consider innovations in areas other than those that made the company successful in the past. Instead of considering a range of options that fit new circumstances, they use their own careers as the only point of reference and do the things that made them successful in the past. For example, when Jill Barad was trying to promote educational software at Mattel, she used the promotional techniques that had been effective for her when she was promoting Barbie dolls, despite the fact that software is not distributed or bought the way dolls are.

Frequently, CEOs who fall prey to this habit owe their careers to some “defining moment,” a critical decision or policy choice that resulted in their most notable success. It’s usually the one thing that they’re most known for and the thing that gets them all of their subsequent jobs. The problem is that after people have had the experience of that defining moment, if they become the CEO of a large company, they allow their defining moment to define the company as well – no matter how unrealistic it has become.

The bottom line: If your boss or several senior executives at your company exhibit several of these traits, now is the time to start looking for a new job.

This is a good read; here is the teaser in nutshell describing the habits of these leaders:

Habit # 1: They see themselves and their companies as dominating their environment;

Habit #2: They identify so completely with the company that there is no clear boundary between their personal interests and their corporation’s interests;

07 January, 2012

New Year has already ushered. You might have finalised on your goals for the year. If you are a leader or looking for a leadership role, I am herewith few mantras to help you become a better servant leader in 2012.

1. Family: I’m going to approach this topic a bit differently than many – If you’re struggling with the family balance thing my advice is simple: don’t attempt to balance your family – make them your priority. I’ve simply lived too long to buy into the myth that success in the workplace will create happiness at home. While it makes for a nice sound bite to console those with a guilty conscience, IT IS A LIE. If your business is growing, but your spouse is crying and your children are neglected, it’s time to do a reality check on your priorities. If your assistant respects you, but your spouse doesn’t you have serious issues that need your immediate attention. If you would rather spend time with your online “friends” than with your children, it’s time to pull the ripcord on your internet connection. Here’s the cold hard truth…if you cheat your family to invest into your career, you and your loved ones will pay a very heavy price. It is simply wrong to value your workplace commitments over your family commitments – moreover it’s not necessary. If your focus is on your family, your career won’t suffer, it will flourish. Get this wrong and not only will your family suffer, but so will you as you someday mourn the loss of what could have been, but cannot be recovered.

2. White Space: While the mind of a leader may be most comfortable being oriented toward the future, he/she can only act in the here and now. The knowledge and skills required to master any endeavour only happens when we focus on what we’re currently doing. This is the definition of presence, and it is only when we operate in the present that real creativity, growth and innovation occur. The problem with being present is that many leaders confuse this with having to do everything themselves. Have you ever interacted with someone who deals with silence by jumping in and filling the conversational void? This same thing occurs with executives who attempt to fill every open slot on the calendar with activity – this is a huge mistake. Smart leaders don’t fill their calenders with useless activities, they strategically plan for white space allowing them to focus on highest and best use endeavors. Leading doesn’t always mean doing. In fact, most often times it means pulling back and creating white space so that others can do. This is true leadership that scales.

3. Listening: Want to become a better leader? Stop talking and start listening. Being a leader should not be viewed as a license to increase the volume of rhetoric. Rather astute leaders know there is far more to be gained by surrendering the floor than by dominating it. In this age of instant communication everyone seems to be in such a rush to communicate what’s on their mind, they fail to realize the value of everything that can be gleaned from the minds of others. Show me a leader who doesn’t recognize the value of listening to others and I’ll show you a train-wreck in the making.

4. Unlearning: I’ve believed for quite some time the most profound and commonly overlooked aspect of learning is recognizing the necessity of unlearning. We’ve all acquired knowledge, beliefs or positions that but for the protection of our ego, would easily admit are outdated. I can think of no better definition for a closed mind than someone unwilling to change their opinions. Smart leaders recognize it’s much more valuable to step across mental lines in the sand than to draw them. Here’s the thing: No one has all the answers, so why even attempt to pretend that you do? Show me a person that never changes their mind, and I’ll show you a static thinker who has sentenced his mind to a prison of mediocrity and wasted potential. If the world is constantly changing, if the marketplace is always evolving, if the minds of others are continuously developing, how can you attempt to be unchanging and still be relevant? The smartest people I know are the most willing to change their minds. They don’t want to be right, they want the right outcome — they want to learn, grow, develop, and mature. Subjecting yourself to dissenting opinion allows you to refine your good ideas, weed out the bad ideas and acquire new ideas. Moreover, it’s the ability to evolve and to nuance thinking that leads to the change and innovation your organization needs to survive. Leaders and their ability to change their mind demonstrate humility, confidence and maturity. It makes them approachable, and it makes them human. People are looking for authentic, transparent leaders willing to sacrifice their ego in favour of right thinking.

5. Engagement: Leadership isn’t about you – it’s about those whom you lead and serve. There are few things as limiting and frustrating as disconnected leaders. Smart leaders spend their time starting or advancing conversations, not avoiding or ending them. The more you engage others, the better leader you’ll become. It’s nearly impossible to engender the type of confidence, trust, and loyalty a leader must possess without being fully engaged. In person, over the phone, via email, through the social web, or even by sending a good old fashion thank you note – ENGAGE.

6. Bonus item – Read: There are few things which impact your thought life more than what you read. I’ve always been a voracious reader, and I plan to continue this pursuit in 2012. I read more than 40 books in 2011, and plan to read more than 50 books in 2012. To the person, the best leaders I know are prolific readers. My message today is a simple one – if you want to improve your station in life, as well as the lives around you – read more. The greatest leaders throughout history have been nothing short of relentless in their pursuit of knowledge. I believe Michelangelo said it best when he uttered the words “Ancora Imparo” which when translated from the Italian means “I am still learning.” By the way, his first public use of this phrase was noted to have been on his 87th Birthday. I don’t know about you, but I’m still learning (and unlearning). Moreover, the day I stop reading, the day I stop learning – that’s the day I stop leading, and likely the day I stop breathing.

Finally, wish you all an amazing LEARNING UNLEARNING & RELEARNING YEAR AHEAD!